The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Ohio. A new federal law would affect all state Internet sales tax laws so be sure to check for updates in this area.
The General Rule: Physical Presence
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
While there may be no clear statement in Ohio’s sales tax statutes or administrative rules regarding how physical presence is defined specifically under Ohio law, other authoritative sources affirm that physical presence, as described in Quill, is the determining factor. In particular, in a 1996 case, the Ohio Supreme Court addressed the issue of whether the physical-presence rule for state sales taxes also applied to taxes on lottery winnings. The court repeatedly affirmed that the physical-presence rule from Quill is the standard for requiring a business to collect and remit sales tax. In turn, both the Quill decision and Ohio Supreme Court decision are relied upon in a 2005 Ohio Department of Taxation (DOT) Tax Information Release, which states that “Quill requires physical presence for sales and use tax nexus,” and “The Ohio Supreme Court relied upon the language in Quill that the physical presence standard applies . . . to sales and use taxes.” (Note: “nexus” in this context means sufficient connection with a state to create a legal obligation—in this case, to collect and remit sales tax.)
In addition, a DOT FAQ page on sales and use taxes states that “If an out-of-state seller has sufficient contact with the state (nexus), the seller is required to abide by Ohio's tax laws,” and that “Examples of activities that create nexus are: regularly having employees or other individuals operating in the state; making regular deliveries of tangible personal property into this state; or any other physical presence in Ohio.”
As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Example 1: You are operating solely out of a warehouse in Minot, North Dakota and make a sale to a customer in Dayton, Ohio—a state where your business has no physical presence: You are not required to collect sales tax from the Dayton customer.
Example 2: You are operating solely out of an office in Cincinnati, Ohio and make a sale to a customer in Toledo, Ohio: You are required to collect sales tax from the Toledo customer.
Example 3: After several years of operating solely out of a warehouse in Minot, North Dakota, you open a one-room satellite office just outside of Columbus, Ohio—a state where previously you had no physical presence. A day later, you make a sale to a customer in Cleveland, Ohio: You are required to collect sales tax from the Cleveland customer.
Non-Taxable and Deductible Items
Some items sold via the Internet to Ohio customers may be exempt from sales tax under Ohio law. For example, most food that is not eaten on the premises where it is sold is exempt from sales tax. For more information, check out the concise, readable FAQ page on exemptions published by the DOT. Alternatively, you can review ORS 5739.02 in its entirety.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” Basic additional guidance on the use tax is available from the DOT FAQ page on sales and use taxes. Among other information, the FAQ page answers the question of whether sales or use tax is due specifically on Internet purchases, by stating “If the seller is not located in Ohio and does not have substantial nexus with Ohio, the seller cannot be required to collect and remit Ohio use tax. However, the purchaser will still owe Ohio use tax on the purchase of goods or services, unless the purchaser has a statutory basis for claiming exception or exemption.”
While you might not know it from looking solely at Ohio’s sales tax statute, the issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. However, at this time Ohio has not enacted any law that would require out-of-state retailers to collect sales tax from Ohio customers.
In Ohio, the physical-presence rule applies for Internet retailers. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the Ohio Department of Taxation to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.